The Power of Discipline
Since the Global Financial Crisis (GFC) in 2007, when I first began to formulate the Financial Fortress concept after suffering another major blow to my net worth, I have made an effort to stay true to the Financial Fortress strategy of broad diversification across many asset classes, regular investment, simplicity and fostering multiple cash flow streams. One of the key tenets of the Financial Fortress that I probably haven't always highlighted enough is the importance of cash flow. Developing multiple cash flow streams and after retaining adequate funds for emergencies, deploying those funds into a broad array of investments is really important. What I have learned over the years and especially over the past year with the COVID stock market correction last March, is that discipline to a strategy is very powerful. Indeed, as the stock market now reaches all time highs again each day and some market observers are calling for a crash, while others think the rally will continue, I can tune all that out through the power of discipline.
A younger me (the one that also experienced the dot.com crash and the GFC) would have sold everything at the bottom back in March and held cash while the market recovered dramatically, missing out on any chance at recovery and again being wiped out financially. I'm sure there were plenty of investors who did just that this time around, perhaps having all their investments in the stock market and very little cash on hand, panic selling and giving in to their fears. Instead, comfortable with my asset allocation strategy, I just let it all play out and looked for my opportunities to put fresh cash to work as the market recovery unfolded. I did suffer some losses in stock options as I have written about previously, but have learned my lesson there as well that you don't want to be a buyer, it's far better to be a seller, especially when the market is volatile like it has been the past several months. I also learned that selling covered calls is probably the best strategy for me personally to generate consistent, relatively low risk double digit returns, provided I hold stocks in good companies and can be patient.
I recall reading somewhere that if investing has become "boring" for you, you are probably doing it right. In reflecting recently upon my portfolio performance, investing cadence and the need for adjustments relatively infrequently, it has become just that for me - boring. Instead of spending all my time looking for "hot" trades and new investments to get into, I spend a lot more of my time on research, watching educational videos and trying to become a better investor. Since the amount of time I have is limited, I feel like investing in education has and will continue to pay off. I have also learned the hard way by losing money over the years on bad investments and those are expensive lessons you will never forget. The good news is that you always have a chance to recover, even if you're older and sticking to a disciplined strategy is a big part of success.
Here's my current portfolio allocation:
Cash - 21.6%
Stocks - 33.7% (about 33.8% of total I actively manage and the rest is passive in ETF's, etc.)
Bonds - 17.7%
Real Estate - 19.5%
Alternatives - 7.5% (includes physical gold, physical silver, music royalties and Bitcoin - this category has grown a lot recently due to the Bitcoin rally, but is still a relatively small allocation in the overall portfolio and I plan to continue my regular purchases of Bitcoin with an indefinite hold timeframe)
I don't plan to change anything dramatically as we move into the new year in terms of the overall allocation or my cadence of regular investing. I have been looking at shifting some of my active stock portfolio investments toward more commodity exposure as the new year unfolds. I recently added a small position in Freeport McMoran (FCX) for this, since it is focused on mining copper and gold, both of which seem poised to continue to rally as the economic recovery gathers steam and especially with Democrat controlled government that will be bullish for fiscal stimulus, infrastructure spending, alternative energy and electric vehicles.
I'm also looking at possibly adding additional positions selectively in gold, silver and energy to capitalize on potential massive fiscal stimulus spending coming soon and further borrowing / debt monetization to finance it. For those areas I like GLD, SLV and CVX. GLD has been trading in a range between $170 and $180 for the past several months and may continue to be relatively flat for some time, especially due to rising interest rates until it can break out of the range. Similarly, SLV has been trading in a range of $21 to $25 in the past several months but probably has better upside as the economic recovery unfolds due to its industrial uses in addition to investment demand. If you are interested in learning more about investing in gold and silver, check out my book here. I'm expecting the Fed will need to act soon to curb the rise in rates (if this trend continues) to support the economic expansion, which should be a positive catalyst for precious metals.
I hope you find this post useful as you chart your personal financial course and Build a Financial Fortress in 2021. To see all my books on investing and leadership, click here.
Stay safe, healthy and positive.